Want to play a “fun” game?  Simply go to Google and type “currency crisis (insert any country name)” and see your results.  Luckily for Americans, you will find that the United States is one of the few countries that seems to have avoided this designation so far.  As one of my Polish friends who immigrated asked me though, “Why do people think it can’t happen here?”  After all, as he was growing up, cigarettes went from $0.50 a pack on Monday to a dollar by Wednesday and two dollars by the weekend.  “Of course it can happen here.  It happens everywhere.” he replied.

Countries in recent history that have been hit with rampant inflation include Turkey, Venezuela, Iran, and Lebanon.  Reasons for this include profligate government spending with accompanying money printing, an unprecedented surge in demand for materials, and a total lack of faith in government institutions.  One might look to recent history and the run on toilet paper at the beginning of the pandemic to understand how quickly this could unfold (no pun intended).

Currently, our deficit is the highest since World War II (before the most recent stimulus) and the Fed is buying $120 B of mortgage and treasury securities each month.  Unbeknownst to most is that we have borrowed most of our national debt from ourselves.  Approximately 22% of the $28 T is owed to Social Security, military pensions, and Medicare.  This number does not include the $7 T owned by the Federal Reserve.  So, what could the beginning of a run look like for investors in the United States?

Government spending disconnects from incoming tax revenue, alternative choices outside of the US dollar become more prominent, and investors find solutions for interest income outside of US Treasuries.  We see signs that some of these things are occurring right now as divestiture of dollars that goes into buying real estate, commodities, stocks, and new asset classes like cryptocurrencies and NFTs (non-fungible tokens).  The latter category includes a $69.3 million art sale in digital format and the first tweet on Twitter which sold for $2.9 million.  My favorite example is a small deli in New York that went public (Ticker: HWIN) and has a $100 million market cap on annual sales of $35k.  The saving grace for the United States at this point seems to be that we are better than the “next guy” with positive interest rates.  This supports the value of the dollar and enables even more borrowing.

If inflation were to occur, one would expect “hard assets” to rally. These include land, commodities, and buildings.  Said another way, the things needed to produce goods or things that could be sold to raise capital. This makes sense as a weaker dollar means you would need more of them to buy these types of assets.  Conversely if a local currency is strong, you would expect these things to go down in value. Companies with large holdings of property, plant, and equipment and investment strategies that trade commodities could do well.  Others with human capital and other “soft assets” that are not recognized on a balance sheet could suffer.

Nobody can predict the future, but we should all be aware that many of those countries mentioned weren’t worried about it either.  But who knows?  Maybe it can’t happen here.

Please reach out to me if you would like to discuss ideas on how to protect your portfolio if you are concerned about inflation.

Greg Taunt – 847-877-0887